For Friday August 23, 2013, We Recommend Against Investing

August 22, 2013

Investment Recommendations:

No Change: Ignore our automated market forecast and avoid US stock markets right now. Continue to avoid all bond investments. Price inflation hedges remain good long-term investments, but only invest in price inflation hedges amounts that you can leave invested for a very long time.

Technical Comments:

The S&P 500 advanced 0.86% on Thursday with volume below Wednesday and lighter than the 30 day moving average. Thursday was a light-volume up-day. The light volume is likely in part to the 3-hour outage on the Nasdaq exchange. Even with the outage the light volume continues a 4-day trend of very light volume. The advance of the S&P 500 was not enough to reverse our stop loss trigger, but another advance on Friday of about 1 point would likely return our automated forecast to a growth trend.

Subjective Comments:

Every Thursday we focus our comments on the US money supply (M2, not seasonally adjusted). Every other Thursday this includes analysis of banking reserves. These are the frequencies the data is published, and it is the weekly money supply that is most important to analyze using Austrian Business Cycle Theory (ABCT).

US M2 continues to grow since its last rapid drop back in April. Over the past 15 weeks (through 8/12) the straight-line annualized growth has been 6.5%. Since the beginning of this year there have been two sudden and significant drops in US M2. As a result the annualized growth since the beginning of the year has been 2.5%. In 2012 annual M2 growth was 9.2%. The most meaningful comparison in these growth rates is the small 2.5% growth since the beginning of the year compared to the 9.2% last year. ABCT explains why the accelerated growth of 9.2% last year caused the most recent bubble-boom in US markets. ABCT also explains why the slowed growth of 2.5% will eventually lead to another crash in US markets. It is the slowdown in the money supply growth that causes the unsustainable bubble-boom to crash.

Excess banking reserves have grown to $2.12 Trillion Dollars while required reserves remain essentially unchanged. Required reserves are required by the Federal Reserve’s regulation to be kept by the bank in proportion to their net outstanding loans. Since required reserves are not changing and excess reserves are increasing it can be concluded the money printing by the Fed is resulting in no new net lending by the banks but instead is growing excess reserves. The Fed Funds rate has not changed in 3 months and the dollars added to the Fed’s balance sheet are almost identical to the increase in excess reserves. This further supports the conclusion the money printing is just going into banks and sitting there.

The slowing of the money supply growth is why bond prices are falling and interest rates are rising, including home mortgage rates. Even though the Fed is printing money and buying bonds and mortgage back securities at $85 Billion per month, this is not sufficient to keep interest rates down. As ABCT explains, the growth rate of the money supply must continue to accelerate to keep the bubble-boom going. A steady or slowing growth rate will bring about the bust. We continue to estimate the timing of the coming US market crash as sometime before the end of this October. Please understand we are guessing about the timing of the coming crash, and our guess is an estimate based on historically similar periods. What is not a guess is the economic reality that the market and US economy will crash as a direct result of the money supply growth slowing. When it happens, blame the Federal Reserve’s money printing (legal counterfeiting) and the fraudulent (but legal) practice of fractional reserve banking.

We would like to recommend to our readers they consider checking out EconomicPolicyJournal.com from time to time. EPJ posts multiple articles per day on economic topics and has excellent commentary. Thanks to EPJ we were made aware of the significance of the second paragraph in the recent publication of the Federal Reserve’s FOMC meeting minutes of the July 2013 meeting. The Fed is looking for a new way to influence excess reserves. Now that there are over $2 Trillion Dollars of excess reserves, the Fed feels they need a way to control the flow of that money should banks start using it to make loans. What is incredible about this is that the Fed already has two tools to control the flow of this money. They can pay interest on excess reserves (IOER) to entice banks to earn interest from the Fed without the risk of making other loans. They can also regulate the amount of required reserves as a percentage of loans the banks make. Both tools are effective, but for some reason the Fed feels the need for a new mechanism that would be “a fixed-rate, full-allotment overnight reverse repurchase agreement facility”. We think if the Fed used IOER or changed reserve requirements it would be extremely obvious to the market what the Fed was trying to accomplish. We think the Fed is looking for a way to control the flow of excess reserves without being noticed. A confusing sounding “fixed-rate, full-allotment overnight reverse repurchase agreement facility” would probably do just that. Sneaky.

Continue to avoid all bonds and US markets right now. We recommend price inflation hedges for part of your portfolio and also cash. Price inflation will be getting worse in the future, so cash is not ideal. We think there will be an opportunity in the near future to short US markets, and cash you have at your brokerage will give you the opportunity to earn a healthy profit when the crash happens. Please tell your friends and family to protect their wealth and position their investments accordingly. We hope you’ll suggest the read our daily posts. If you want additional insight we recommend subscribing to the EPJ Daily Alert.

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